Settlements on occupied territory are considered illegal under international law, though Israel disputes this.
Mr Gibbs said: "We are dismayed at the Jerusalem Planning Committee's decision to move forward on the approval process for the expansion of Gilo in Jerusalem.
"Neither party should engage in efforts or take actions that could unilaterally pre-empt, or appear to pre-empt, negotiations."
It is the second time in two months that the Obama administration has spoken out on settlements.
In September the White House said it regretted reports that Israel planned to approve new construction in the West Bank.
The BBC's Paul Adams in Washington says the conventional wisdom in the US is that Israeli Prime Minister Benjamin Netanyahu has successfully thwarted Barack Obama's first foray into the stalled Middle East peace process, rebuffing American calls for a complete settlements freeze.
State department spokesman Ian Kelly said the planning decision was dismaying
But some Washington observers say it's too early to write off the president's efforts, he says.
They believe Mr Obama is playing a long game and that the frosty relations between Mr Netanyahu and the White House could cause problems for the Israeli leader in the future, our correspondent adds.
Mr Ban's spokeswoman said the UN chief believed the Israeli action would "undermine efforts for peace and cast doubt on the viability of the two-state solution".
French Foreign Minister Bernard Kouchner said his government "regretted" the move, while Saudi Arabia said the approval was a "major obstacle" to the peace process.
Israeli media reported earlier that the government had rejected a request from Washington to freeze the construction work at Gilo.
Mr Obama's Middle East envoy, George Mitchell, is said to have made the request to Mr Netanyahu at a meeting in London on Monday.
Mr Netanyahu replied that the project did not require government approval and that Gilo was "an integral part of Jerusalem", according to Israel Army Radio.
On Wednesday, the Israeli interior ministry disputed that East Jerusalem was occupied territory, and said that building there was like building anywhere else in the city. Areas annexed to Jerusalem were not part of any accommodation of Mr Obama's call for "restraint" in settlement construction, it said.
The mayor of Jerusalem, Nir Barkat, meanwhile told the BBC that Arabs and Muslims were free to buy the new homes, just as Jews were.
"Jerusalem is a sovereign city, united under one law that does not discriminate between Jews and Arabs. In the last 15 years, the Arab population has grown even faster than the Jewish population and as long as people build legally in the city they're most welcome to do so," he said.
The Palestinians have refused to re-enter peace negotiations unless Israeli completely halts all building work in settlements in the West Bank and East Jerusalem.
Israel has scaled back construction in the West Bank, but says it does not consider areas within the Jerusalem municipality to be settlements.
The BBC's Tim Franks in Jerusalem says Tuesday's announcement represents by far the largest batch of planning approvals for building on occupied territory since Mr Netanyahu became prime minister.
The 900 housing units, which will be built in the form of four-to-five-bedroom apartments, will account for a significant expansion of Gilo.
The interior ministry said construction work would be unlikely to start for another three or four years.
A spokesman for Palestinian Authority President Mahmoud Abbas said the planning approval was "yet another step that shows and proves Israel is not ready for peace".
Nearly 500,000 Jews live in more than 100 settlements built on occupied territory in the West Bank and East Jerusalem.
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